There have been a lot of posts about debt on this blog and the chart comparing government and household debt, which appeared in two of those debt posts, has proved particularly popular in discussion forums focusing on Australian property prices. Since producing the chart, the Australian government stimulus spending has continued to work its way through the economy and has been pushing up the levels of government debt. While I would still argue, as I have done many times before, that we should not follow the likes of Barnaby Joyce in getting agitated about public debt, it does seem worth updating the chart to illustrate recent developments. The regions shaded red denote Labor party governments in power.
Australian Government and Household Debt (1976-2010)
As expected, government debt levels exhibit a marked up-swing (note that the government data includes Treasury projections to the end of the current financial year). What is striking, however, is that the levels of household debt have not yet fallen. While some of the weakness in the economies of countries like the US and the UK is attributed to consumers “deleveraging” (a fancy term for paying down debt rather than buying flat-screen televisions), Australian households are showing no signs yet of reducing their debt. And 90% of that debt is for housing.
While it may not be evident here, there is in fact a tight relationship between debt levels in different sectors of the economy. If I spend money then either I reduce my financial assets (drawing on my savings) or I increase my liabilities (borrow on my credit card or some other form of debt). Exactly the reverse is true of whomever I give my money to (let’s call them Joe for argument’s sake): Joe’s assets go up or his liabilities go down. Spending money is an example of a “zero sum game”. If I add the change to my net worth (assets minus liabilities) to the change of Joe’s net worth it adds to zero. My negative change offsets Joe’s positive change. Aggregating over the whole economy, the sum is still zero.
Now consider what happens if we divide the economy’s net financial worth into that of the government sector, the private sector and the foreign sector (which includes overseas governments). Any changes in net worth across all three have to add to zero. As a result, the change in the government position is the opposite of the change in the private sector and international positions combined. If the government debt is going up, debt must be going down somewhere else. Now we know the household sector is not reducing debt, but what if we look at the private sector overall, including businesses? A different picture emerges.
Australian Government and Private Sector Debt (1976-2010)
Taken as a whole, over the 12 months to the end of 2009, private sector debt fell by about 2.5% of GDP. This was almost as much as government sector debt rose (about 3% of GDP). The difference can be explained both by the role of the foreign sector as well as slight differences in data collection methods across different sectors. Keep in mind that chart includes the government debt projections out to June 2010, while the private sector debt data only extends to the end of January 2010.
Since household debt has continued to increase, what this means is that Australian businesses have in fact been reducing debt significantly. The reduction in non-household private sector debt over 2009 was almost 7% of GDP. Businesses appear far more concerned about their debt levels than home-buyers do. It will be very interesting to see what happens once the first time home buyers scheme is fully unwound.
Private sector debt: Reserve Bank of Australia – Series D2
Gross Domestic Product: Australian Bureau of Statistics – Series 5206.0